Researcher Puts China’s Local Government Debt at $3.3 Trillion

September 17, 2013, 6:46 a.m. ET

Researcher Puts China’s Local Government Debt at $3.3 Trillion

BEIJING—A Chinese government researcher estimates that China’s practices of borrowing heavily to fuel investment-driven growth have as much as doubled local government debt in just two years to around 20 trillion yuan ($3.3 trillion). The researcher, Liu Yuhui of the Chinese Academy of Social Sciences, said the current dependence on heavy borrowings to drive rapid economic growth is unsustainable.“My point is that there has been a notable rise in the overall government debt level over the past two years,” Mr. Liu, director of a financial-research unit at the influential think tank, said in an interview.

The last full audit of local-government borrowings in China estimated debt at 10.7 trillion yuan ($1.75 trillion) at the end of 2010. A separate audit of 36 local governments, including both provinces and cities, found that these governments together had outstanding debt totaling 3.85 trillion yuan at the end of 2012, up 12.9% from 2010.

Mr. Liu said that according to his estimate, local-government debt reached the 20 trillion yuan level at the end of last year.

The researcher calculated that the total level of the nation’s debt—including that of the central government—as a percentage of its gross domestic product likely rose about 16 percentage points last year. China’s credit as a percentage of GDP was 182% at the end of 2012 and 167% at end of 2011, according to calculations by The Wall Street Journal based on data from the central bank.

Explaining how he reached his estimate on his Twitter-like microblog on Sina Weibo, Mr. Liu said local governments have borrowed 9.7 trillion yuan through direct bank lending, 4 trillion yuan to 5 trillion yuan via so-called shadow lending—the gray area that exists alongside the traditional banking system, including lending from trust companies—and another 6 trillion yuan to 7 trillion yuan through various forms of IOUs.

The researcher said he based the breakdown on public information such as banks’ balance sheets, his own calculations and information from regulators.

In response to the 2008 financial crisis, many local governments undertook major spending projects to keep economic growth on track. Much of this was financed through special investment companies set up to skirt rules barring local governments from borrowing directly from banks.

China’s National Audit Office, in an effort to get a more accurate picture of borrowings at the local level, said in July it had started a comprehensive investigation into local-government debt.

Mr. Liu said he expects the government to announce a total local-government debt level of between 17 trillion yuan and 18 trillion yuan.

The National Audit Office couldn’t be reached for comment on Tuesday and the Finance Ministry didn’t immediately respond to a faxed request for comment.

China’s leaders have repeatedly said that the level of local-government debt is under control.

Overall, local-government debt is manageable as new debt is growing at a slower pace, Finance Minister Lou Jiwei said in an interview with state-run broadcaster China Central Television this month.

Premier Li Keqiang told an economic conference last week that local-government debt is within “safe levels.”

Vice Finance Minister Zhu Guangyao said earlier this month on the sidelines of meetings of the Group of 20 industrialized and emerging economies in Russia that the government may find that the total volume of local-government debt has only risen slightly.

But Mr. Liu—as well as some other economists—appears to be raising doubts around these assessments.

He said one problem is the widely held assumption that the central government will rescue any local administration unable to repay its borrowed funds, which means local governments have little incentive to keep their borrowing in check.

“We can manage under the current system for now but potential risks could materialize in the future,” Mr. Liu said.

Separately, a state-owned asset-management firm, China Orient Asset Management Corp., said Chinese commercial banks are facing a resurgence in nonperforming loans. It said in a report this week that the bad-loan ratio at commercial banks is expected to reach 1% to 2% this year, while the volume of new bad loans will climb more than 5% from a year earlier. It attributed deteriorating asset quality to slower economic growth.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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